by Jason Bodner

February 22, 2023

At many points in our lives, we must ask ourselves, “Am I doing what is best for me?” But as creatures of habit, it’s easy to slip into routine and overlook the obvious. For instance, did you know that studies show that indoor air can be roughly five times more polluted than outdoor air? Yet most Americans spend 90% of their time indoors.

Likewise, investors should ask themselves, “Am I doing what’s best for me?” The answer can be confusing. That’s because many everyday investors don’t really have the tools to answer it…

First off, most investors simply don’t know what they are doing. And as far as professionals go – perhaps they too should ask the same hard stare-in-the-mirror question. A 2020 study found that over a 15-year period, over 90% of actively managed investment funds (in most categories) failed to beat the market.


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

To be fair, the stock market is a confusing place. It’s up one day – down the next. One day we stress about war and interest rates. The next day we cheer earnings and ponder the latest incarnation of the recession debate: a “no-landing” situation. If you’re frustrated, clearly, you’re not alone.

Let’s get real for a second: If fewer than 10% of pros can beat the market in most categories, how can the everyday investor expect to beat the market? The answer, I believe, lies in data. The removal of emotion from investing might enable investors to answer that tough question: Am I doing what’s best for me?

I think it pays to be rigorous about data analysis. For me, emotion has little if any place in the world of investing. That’s why I follow the data: it’s unemotional, calculated, and completely objective.

Here’s what the data is saying now…

Last week I did a study on what to expect when you’re expecting an overbought market, which the Big Money Index says started on February 8th. To reiterate what it said about data going back to 1990:

  • The average overbought period lasts 23 trading days, or just under 5 weeks.
  • It took 16 days on average until the S&P 500 finally peaked, with an average gain of +3.1% more gains after the first day overbought.
  • Once the market peaked, it took on average of six days until the last day overbought.
  • The market fell an average of -1.8% from the peak to the last overbought day.

Here is a summary:

BMI Overbought Table

Plugging in those averages, the markets should stay overbought until March 14th. However, the past year and change has been anything but average. The latest BMI data suggests a short-lived overbought period.

With last Friday being the third Friday of the month, it was an options expiry day. That typically brings elevated volumes. Thus far, markets are in the red which indicates that the BMI will fall out of overbought upon the close. This means when markets open Tuesday, in all likelihood, overbought will be over:

BMI Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That’s both bad and good news. The bad news is that markets are usually choppy and soft immediately following an overbought period. This makes sense as buying wanes, any selling becomes more meaningful. In short- if less people are buying, then we can expect softer price action.

But there’s good news, too: Markets have usually done quite well after overbought periods, historically. The S&P 500 was positive – on average – 1, 3, 6, 9, and 12 months later:

S&P 500 Table

Let’s also analyze why we went overbought in the first place. After a year scarred by intense selling of stocks, we predicted a rally to start in October and last through April. Again, this was based on historical averages. It’s important to know that when stocks have been depressed for a long time, it doesn’t take much to perk them up. Part of our signal is that the stock must trade below an interim low to generate a sell. It must also trade above an interim high to make a buy. If stocks have been under pressure and trending lower for a long time, the high needed to create a buy gets lower and lower. When capital suddenly rushes in, perhaps to cover shorts, buy signals can appear quickly. This was seen in August last year. It quickly gave way to September and early October selling, Then, my prediction came to pass, and markets started rallying in mid-October. Buy signals appeared. This is seen in both stocks and ETFs:

Big Money Stock-ETF Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The rally may have started as a short-cover rally. There is plenty of data to suggest that. But then the rally just kept going with a small pause in January. Buying reached an absolute fever pitch February 2nd when we saw 456 stocks bought: the most since June 5th 2020. That was the peak of buying for now, so it stands to reason with feverish buying and an overbought market that things are a little over-heated.

In other good news, buying has been heavily concentrated in growth areas: These pie charts show tech, discretionary, industrials, and financials accounting for 60% of all buying since January 1st. Contrast that with Health and Energy accounting for 40% of all selling since then:

Percent Buys-Sells PIE Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Buying pushes growth sectors higher while staples, health care, and utilities are getting pushed lower:

Discretionary vs XLY Technology vs XLK Charts

Industrials vs XLI Materials vs XLB Charts

Financials vs XLF Energy vs XLE Charts

Staples vs XLP Real Estate vs XLRE Charts

Comm vs XLC Health Care vs XLV Charts

Utilities vs XLU Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In even more good news, the buying since January has been heavily focused in small and midcap stocks. This is another strong indication of “real” buying, as opposed to a mere short-cover situation:

Market Cap Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So there you have it – the data presents a pretty strong picture. The scary headlines will persist, but the data is saying that despite an overbought market, I expect some promising returns on the horizon.

Why stay indoors when outdoors is healthier for us? Many investors rely on news and pundits to chart their investing maps. That works for some, but odds say it doesn’t work that well for 90% of managers.

Perhaps data may help make better judgments.  As Will Rogers said, “Good judgment comes from experience, and a lot of that comes from bad judgment.”

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Global Vise Tightens on Russia

Income Mail by Bryan Perry
Mounting Confusion About What Lies Ahead

Growth Mail by Gary Alexander
Explain This! Flat GDP + Market Crash = Soaring Tax Revenues!

Global Mail by Ivan Martchev
The Bond Market Now Looks to the Fed

Sector Spotlight by Jason Bodner
What Does an “Overbought” Market Mean?

View Full Archive
Read Past Issues Here

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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